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Your Little Shop and the Global Disaster Spread

Here’s the commercial insurance forecast, as reinsurers spread global risks of natural disaster: Expect more premium increases and increased deductibles, wherever.

Adams Street near the State Docks, in Mobile, flooded on Aug. 29, 2012 by Hurricane Isaac. Water also reached to the bottom floors of downtown office buildings.

Adams Street near the State Docks, in Mobile, flooded on Aug. 29, 2012 by Hurricane Isaac. Water also reached to the bottom floors of downtown office buildings.

AP Photo/Butch Dill

Ask commercial insurance agents along Alabama’s Gulf Coast about the impact of catastrophic weather events, and you’ll hear repeated references to “before Katrina” and “after Katrina.”

“Hurricane Ivan hit in 2004 and actually did more property damage in Alabama than Katrina, which came in 2005,” says Clyde Smith, marketing manager at Mobile-based Lyon Fry Cadden Insurance Associates Inc. “But Katrina was such a large storm and encompassed such a large area in terms of damages. You’re not really prepared for something that large. Katrina changed everything.”

After Katrina, the very structure of commercial property coverage policies changed along the coast, and that structure is now common throughout the state.

“Before Katrina, our rates were actually higher, but we had a flat wind deductible,” Smith says. “But after Katrina, we’ve had a percentage wind deductible. You didn’t see a lot of percentage wind deductibles before Katrina.”

Before Katrina, a building owner near the coast might have had a $5,000 deductible, so if that building had $200,000 in damages, the insurance carrier would be saddled with a $195,000 loss. That scenario would never happen now. Today, that same building owner would have a 5 percent wind deductible. “So if the building is worth $2 million, the owner would pay the first $100,000 in damages,” says Allen Chapman, an executive vice president with HUB International’s Gulf South Office in Metairie, La.

Hurricanes aren’t always the only concern, even in coastal areas. Policies can be written to address any possible damages, but the trend now is to use percentage deductibles to protect the insurance companies.

Chapman notes that a rare tornado hit Mobile on Christmas Day 2012, and state officials are still looking at ways to repair damages from that storm as this issue of Business Alabama goes to print. “You might have a policy where you’ve got a 5 percent deductible for damages from a named storm, a hurricane,” Chapman says. “With the same policy, you might have a $25,000 deductible for other wind damage, like a tornado. And you might have $5,000 deductible for all other perils.”

Such policies, largely created in response to severe weather events, have “competitive edges” that help protect the insurance companies in the face of overwhelming damages. But customers stand to gain from these kinds of policies, especially when the insurance carriers take a hard look at customer needs, according to Chapman and others.

John Byars, a vice president with Jasper-based Byars & Associates and manager of the company’s Gardendale office, says that property policies with percentage deductibles have become common throughout the state in the past three to five years.  “It’s a more logical product,” Byars says. “It makes more sense for the customer and the insurance company.”

Remnants of Express Oil Change, a 25-year-old Tuscaloosa business leveled by the 2011 tornado. Owner John Carney rebuilt in 16 months. Next door, a Krispy Kreme Donuts shop was also destroyed and rebuilt.

Byars recalls the enormous impact of April 27, 2011, when more than 60 tornadoes touched down in Alabama, killing more than 250 people in central and northern parts of the state. His agency handled more claims from that day than any other in its 67-year history. In addition to the widespread wind damage, Byars recalls other situations resulting from those storms and lessons that were learned.

“You had a lot of businesses that didn’t have structural damage, but they were without power for three or four days because of off-site damage to utility power sources,” he says.  “So they still had losses.”

A grocery store, for example, might have had $100,000 worth of refrigerated foods, and some stores had pharmaceuticals that required refrigeration. But without power for refrigeration over several days, those products would spoil.

“A lot of people who didn’t have coverage for those situations have it now,” Byars says. “Customers are being asked to participate more in the process, either by paying higher deductibles or by taking proactive steps to prevent losses. In this case, as an example, they can buy back-up generators.”

Whereas many residents in Alabama’s coastal area have had trouble finding homeowners insurance, that has not been the case with commercial coverage.

“There does not seem to be an issue for the availability of coverage for accounts along the coast, on average,” Chapman says. “The larger the schedule of values of the property, the more complex the account becomes to put together coverage for the full limit. You may not be able to find one carrier that will write the full limits on a $250 million schedule of property, so the broker will have to structure a tiered program whereby various carriers are participating in the coverage at various limits. Carrier ABC will write the first $5 million in values and carrier BCD will pick up the next $10 million in values in excess of the first $5 million, and so on until the full limits are covered.”

“This is more so a problem for the coastal residents than it is for businesses located in mid to northern Alabama,” says David Dennis, a principal with Montgomery-based Harmon Dennis Bradshaw Inc. “I do not see any problems with availability nor have we had any problem replacing coverage. Of course, the rate for the replacement may be higher than what a policy holder prefers to pay, but the availability of coverage is not really an issue.”

Sand bags bolster the entrance to Wells Fargo bank in downtown Mobile on Aug. 29, 2012, after Hurricane Isaac had dumped more than five inches of rain on the Alabama coast.

AP Photo/Butch Dill

But there are some questions about why rates seem to be so much more than pre-Katrina days, especially along the coast. After all, there has been no major hurricane there in eight years.

Jim Conner, vice president of administration for Mobile-based Scotch & Gulf Lumber LLC, says that insurance prices were stable or perhaps receding a bit three years ago in the Mobile area, where his company operates three mills. “But now we’re seeing a tightening of the reinsurance market, and it isn’t because of Ivan or Katrina,” Conner says. “There was Sandy (last fall in New Jersey and New York), and now you’ve got flooding in the Midwest. When you stop and think about it, the United States really is not that big, and any type of large-scale property damage affects reinsurance firms, and that affects insurance everywhere.”

Reinsurance, in short, is insurance purchased by insurance companies as additional protection against possible losses from policies that they’ve written. When reinsurance rates increase, insurance companies will typically increase their rates as a way to maintain profits. Says Harmon Dennis Bradshaw’s Dennis: “When the reinsurance market — which is a much, much smaller arena of players — has to recapture large losses, most every carrier is going to absorb, then pass along rate hikes to survive in this competitive marketplace.”

Chapman notes that there has been global consolidation in the reinsurance industry, just like in the banking and financial services industries, which essentially makes the world a smaller place. A catastrophe like the 2011 tsunami in Japan, for example, will impact insurance rates along the Alabama coast. 

Higher deductibles are a predictable fallout from April 27, 2011, when more than 60 tornadoes touched down in Alabama.

“Every catastrophic event adds to the picture,” he says.

In addition, data-rich pricing models have become more refined, and those models take into account all natural catastrophes, not just those in a given area. “It’s all in a computer,” Chapman says. “Of course, real life might be very different. We haven’t had a hurricane along the Gulf Coast since 2005, and people do wonder why rates aren’t going down.”

Andy Prewitt, secretary/treasurer of Birmingham-based J.R. Prewitt & Associates, says many insurance companies are raising rates in light of higher reinsurance rates, higher loss ratios and less-than-hoped-for investment income. “We see rates steadily increasing through the end of the year, in the 3 to 8 percent range,” he says.

Chapman and Smith see it much the same way: slight increases in rates for at least the rest of the year. “I have been seeing most of the property carriers looking for an increase in rates since the first of the year,” Chapman says. “On average, they seem to be asking for a 5 percent to 10 percent increase. What they are able to get is more in the 3 percent to 5 percent range. Of course, this is on average, on an account with a good loss history with little to no claims. Each case can vary depending on the risk.”

Says Smith, “We expect small increases the rest of the year — 5 percent or less.”

Charlie Ingram is a freelance writer for Business Alabama. He lives in Birmingham.

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